Consumption spend may rise this year: India Ratings

MUMBAI: Private consumption expenditure tends to grow in the quarters following general elections in India and lift the economy, shows a study by India Ratings, a ratings company, alleviating concerns that the El Nino weather phenomenon could hurt agriculture growth this year and thwart economic revival.

According to the study, private consumption expenditure jumped 21 per cent in the immediate quarter following the 1991 elections, against a dip of 2.5 per cent in the previous quarters.

In 2004 and 2009 too, consumption expenditure picked up in the two consecutive quarters after the elections compared with the previous quarters. But why does private consumption expenditure pick up after the elections?

"One, there is normally some pentup demand which materialises post elections as political risk gets reduced," explained Rakesh Valecha, senior director-corporate sector ratings at India Ratings. "Besides, there is a spillover effect of election spending, which also benefits consumption and could also be provided by the spillover effect of the agricultural growth in 2013-14."

The pick-up in consumption could benefit some retail-oriented sectors. "Companies catering to the rural sector could benefit from this trend. Furthermore, consumption across non-discretionary sectors like FMCG, textiles and, to an extent, retail could benefit," said Valecha.

Moreover, with a capex cycle expected to turn from the last quarter of the current fiscal, there could be some further pick-up in consumption, benefiting companies across sectors.

However, a section of economists says there is not much evidence to support the hypothesis that private consumption expenditure surges in post-election quarters.

The boost is uneven, both during the election quarter and the one after that, these economists insist. But this time around, the Reserve Bank of India's consumer confidence index of January-March was higher, indicating that consumption would pick up, said Samiran Chakrabarty, chief economist of Standard Chartered Bank.

Besides, consumer spending could get a boost as the recent elections have thrown up a stable government.

"A priori expectations of a stable, dynamic government are likely to foster confidence, which might lead to expectations of income growth, resulting in consumption purchases being brought forward," said Saugata Bhattacharya, chief economist of Axis Bank.



Bhattacharya, however, warned that there might have been some idiosyncratic factors driving the change in the quarters cited in the India Ratings study: global boost to exports, better agriculture output (mostly rabi, but also kharif), a fall in interest rates and equity marketsdriven wealth effects. "However, inflation could act as a spoke, though our base case assumption is that inflation could trend downwards in FY15," said Valecha.